UNIVERSAL UNDERWRITES INSURANCE COMPANY v. KNEELAND

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Plaintiffs appeal by leave granted the circuit
courts order affirming the district courts grant of
summary disposition to defendant. We reverse.

I

The facts are undisputed. On November 15, 1993,
defendant took her car to Betten Toyota to be repaired. On
November 16, 1993, Betten Toyota loaned defendant a
"courtesy car," a 1991 Previa, while her car was being
repaired. On that date, defendant and a Betten Toyota employee
signed a form entitled "Courtesy Car Agreement" that
stated five terms:

1. Rental fee ONLY
$28.00 per day.

2. Renter agrees to replace
gasoline used.

3. Renter agrees to pay cash
for rental charge.

4. Renter agrees to assume all
responsibility for damages while vehicle is in
his possession.

Renter agrees not to sublet or loan
the car to anyone.

On November 20, 1993, while defendant was
driving the Previa and was stopped at an intersection, two other
vehicles collided and caused damage to the Previa. There is no
claim that defendant was negligent. Universal paid $3,738.49 for
the damage to the van, pursuant to an insurance policy it had
issued to Betten Toyota, and became subrogated to Betten
Toyotas rights. Betten Toyota paid the $1,000 deductible
under the policy. Universal requested reimbursement from
defendant, which she denied, and then filed suit against
defendant alleging breach of contract. Betten Toyota later joined
the case, [1]seeking to recover its $1,000 deductible.

Universal filed a motion for summary
disposition, relying on the express terms of the courtesy-car
agreement. It reasoned that although the no-fault act abolished
tort liability for the damage at issue, MCL 500.3135; MSA
24.13135, defendants contractual liability remained.
Universal directed the district courts attention to a Kent
County case, Universal Underwriters Ins Co v Stout, No.
92-78508 AV, in which, on almost identical facts, the circuit
court ruled in favor of the plaintiff insurer.

In response, defendant asserted, inter alia,that plaintiffs were precluded from seeking recovery from
defendant under Universal Underwriters Ins Co v Vallejo,
436 Mich 873; 461 NW2d 364 (1989), revg 179 Mich App 637;
446 NW2d 510 (1989),in which the Supreme Court held
that an automobile dealerships subrogee could not maintain
an action under an implied or express contractual bailment theory
to seek recovery from a potential customer who was involved in an
accident while test driving a dealership vehicle. Defendant also
argues that Bretten Toyota committed fraud by failing to inform
defendant that she would not be covered under Bretten
Toyotas insurance, and that the agreement was ambiguous.
Defendant requested that summary disposition be denied to
plaintiffs and granted to her.

During the time the district court had the
matter under advisement, this Court reversed the circuit court in
the Stout case. Universal Underwriters Ins Co v Stout,
unpublished opinion per curiam (Docket No. 171069, issued
2/2/96). The district court followed this Courts decision
in Stout and granted summary disposition to defendant,
dismissing Universals claim.

After the parties stipulated that Betten
Toyotas claim would be governed by the outcome of the final
ruling on Universals claim, plaintiffs filed an appeal in
the circuit court. The circuit court upheld the district court, [2]and this Court granted plaintiffs application for
leave to appeal.

In Kinnunen, supra, the plaintiffs
agreed to allow the defendants to use a horse trailer to
transport a pony. The trailer was damaged in an auto accident
while in the defendants possession. The plaintiffs brought
suit alleging breach of contract, including breach of an
agreement to return the trailer in the same condition as when
taken, and breach of a specific contract to repair the damaged
trailer. The defendants brought a motion for summary disposition,
asserting that the plaintiffs claim was barred by the
no-fault act. The circuit court granted the motion, but this
Court reversed, stating in pertinent part:

This case presents a unique question:
Does the Michigan no-fault automobile insurance act bar
an action for recovery of property damages arising out of
a motor vehicle accident, where the parties entered into
a legally enforceable contract both before and after the
accident making defendants responsible for returning a
trailer in an undamaged state?

There is no question that, absent the
no-fault act, plaintiffs and defendants had the right to
enter into an enforceable contract whereby plaintiffs
would promise to provide the benefits of their trailer to
defendants in consideration for defendants promise
to assume all liability for any damages that might occur
to said trailer while in defendants possession.
Since we are reviewing an order for summary judgment . .
. we assume that factual developments would establish the
existence of a contract or contracts.

However, MCL 500.3135(2); MSA
24.13135(2) provides that tort liability arising from the
ownership, maintenance, or use within the state of a
motor vehicle is abolished except as to certain
circumstances which are inapplicable herein. It is this
provision upon which defendants and the trial court
relied in concluding that plaintiffs action was
barred. . . .

. . . having reviewed plaintiffs
complaint, we find [unlike the trial court] that
plaintiffs premised their theory of recovery upon
defendants failure to comply with the terms of a
contractual agreement and not upon defendants
negligent ownership, maintenance, or use of a motor
vehicle, although it was through defendants use of
a motor vehicle that damages were incurred. Therefore, we
find that plaintiffs claim is not barred.

In so ruling, we adhere to the
principle that statutes which abolish the common law
should be narrowly construed. MCL 500.3135; MSA 24.13135
clearly and unequivocally states that tort
liability is partially abrogated. The term
tort liability is clear and unambiguous and
does not include liability that may arise out of a
legally enforceable contract. Had the Legislature
intended to abrogate contractual liability as well, the
words any liability arising out of the
ownership, maintenance, or use of a motor vehicle
could easily have been substituted. We conclude that
under a straightforward reading of the statutory language
of Sect. 3135 of the no-fault act, contractual liability
is not abolished by said section even where said
liability arises out of the ownership, maintenance, or
use of a motor vehicle. [Id. at 637-639. Citation
omitted.]

Similarly, in Ben Franklin, supra, the
plaintiff insurers subrogor, an equipment company, owned a
loader that it loaned to the defendant. The defendant loaded the
loader onto its tractor, and while transporting the loader on a
public roadway, the loader struck an overpass and was extensively
damaged. The plaintiff insurer paid for the damage and then
brought an action against the defendant, alleging negligence,
breach of express and implied warranties and breach of bailment.
The defendant argued in a motion for summary judgment that
plaintiff’s claims were barred by the no-fault act. The circuit
court granted the motion. However, this Court reversed, noting:

Plaintiff argues first that since MCL
500.3123(1); MSA 24.13123(1) excludes damages to the
contents of vehicles operated upon a public highway from
property protection insurance benefits under the no-fault
act, plaintiff is entitled to pursue its common-law tort
remedies. We agree that the loader was a content of
defendants tractor at the time of the accident. The
damage to the loader, however, arose out of
defendants use of its tractor as a motor vehicle.
Tort liability for property damage arising from the use
of a motor vehicle in this state has been abolished,
unless the damage is intentionally caused. MCL 500.3135;
MSA 24.13135; Citizens Ins Co of America v Tuttle,
411 Mich 536, 544; 309 NW2d 174 (1981). Thus, defendant
is not liable in tort for damage to the loader which may
have been caused by defendants negligent operation
of its tractor.

Plaintiff argues next that even if its
cause of action in tort based on alleged negligent
operation of a motor vehicle is barred by the no-fault
act, its alternative theories state claims upon which
relief can be granted. Plaintiff has not taken pains to
explain its alternative theories on appeal. While we note
that bailment actions sound in property law and breach of
warranty actions sound in contract, plaintiff argues on
appeal that it is seeking recovery for property damage
which arose out of defendants breach of its
warranties or duties under its contract of
bailment. In this case, therefore, it appears that
plaintiffs breach of warranties theory is
inseparable from its bailment theory, plaintiffs
claim being based on contract principles.

We agree that the no-fault act does not
abolish contractual liability. . . . Nothing in the
no-fault system relieves a motor vehicle operator of
liability which he may have incurred in contract. It was
within the powers of the contracting parties to agree on
which party would assume the risk of damage to the
loader. Plaintiffs theory that defendant breached
express and implied warranties in the governing contract
of bailment does, therefore, state a claim upon which
relief can be granted. . . . [124 Mich App at 511-513.][6]

B

These authorities notwithstanding, defendant
relies on the Supreme Courts order of peremptory reversal
in Vallejo, supra.

1

The defendant in Vallejo was a potential
customer of an automobile dealership who was involved in an
accident while test driving a vehicle. The dealers insurer
paid for the damage to the vehicle (less the dealers
deductible) and brought a subrogation action against the
defendant customer. The complaint alleged that the defendant
"expressly and/or impliedly" agreed to return the car
"in the same condition as it was when he took
possession" and that he "fail[ed] to keep the property
safe and free from any damage." 179 Mich App 640. It further
alleged:

That the above-described business
relationship between Defendant Vallejo and Martin
Chevrolet Sales, Inc., constitutes a contract as a result
of the express and/or implied bailment agreement reached
between the parties. [Id. at 640-641.]

The defendant moved for summary disposition,
arguing that the defendant’s test drive of the vehicle with the
permission of Martin Chevrolet did not constitute a bailor-bailee
contract and that the plaintiff’s claims were barred by the
no-fault act. Id. at 639. The circuit court granted the
defendant’s motion. This Court reversed, stating that "the
[no-fault] act did not abolish contractual liability for losses
arising from the use of a motor vehicle." The Court
explained:

In the present case, plaintiff sought
to impose liability against defendant for losses incurred
as a result of defendant’s breach of a bailment contract.
It follows, therefore, that plaintiff’s contract claim
was not barred by the no-fault act. [179 Mich App 642.]

This Court further stated:

That a bailment contract may be created
under circumstances such as those present in this case is
not in any way surprising. Defendant was given the
temporary use of the car owned by Martin Chevrolet for
the special purpose of test driving it. Clearly, an
implicit, though perhaps unwritten, prerequisite of such
use was that defendant agreed to return the car in the
same condition it was in when driven away from the
dealership. [Id. at 643-644.]

The opinion also quotes from Am Jur 2d the
statement that "the word contract is used in a
broad sense." Id. at 644. The Court concluded that
the dealers insurer had stated a valid claim for a
"breach of bailment contract." Id. at 645.

The Supreme Court, however, peremptorily
reversed:

In lieu of granting leave to appeal,
the August 21, 1989 judgment of the Court of Appeals is
reversed, and the case is remanded to the Saginaw Circuit
Court for entry of judgment in favor of the defendant.
MCR 7.302(F)(1).

Although the trial court gave the
plaintiff insurer numerous opportunities to explain, with
specific factual allegations, how its conclusory
allegation of an express or implied contract of bailment
differentiated this case from any other situation in
which a permissive user of a car is involved in a
collision and therefore cannot return the car to its
owner in an undamaged condition, the plaintiff repeatedly
failed to do so. Under these circumstances, we think the
trial court correctly granted the defendant’s motion for
summary disposition.

By operation of the pertinent insurance
statutes, e.g., MCL Sect. 257.520(b)(2); MSA Sect.
9.2220(b)(2) [7]and MCL
Sect. 500.3009; MSA Sect. 24.13009[8], the defendant appears to
have been insured by the plaintiff against the very loss
at issue in this case, since a standard automobile policy
typically insures such a permissive driver "against
loss from the liability imposed by law for damages
arising out of the ownership, maintenance or use of"
a motor vehicle. [436 Mich 873.]

Relying on this Courts unpublished
decision in Stout, defendant argues that the instant case
is controlled by Vallejo, and that in Vallejo the
Supreme Court concluded that allegations of an express or implied
contract of bailment did not differentiate the case from any
other where a permissive driver of a car is involved in a
collision, so that, in the instant case, the presence of an
express contract is irrelevant. We disagree.

2

Vallejo is distinguishable from and does
not govern the instant case. Unlike the instant case, there is no
indication that there was an express contract in Vallejo.
The plaintiff insurer in Vallejo sought to recover from
the customer who test drove the vehicle under a common-law
bailment theory, 179 Mich App at 639, while plaintiffs in the
instant case sought to recover under a contract theory based on
the written agreement defendant signed stating that she agreed to
"assume all responsibility for damages" while the
vehicle was in her possession.

Defendant erroneously equates her express
agreement assuming all responsibility for damages to the vehicle
with the "express or implied contract of bailment" in Vallejo.
We do not read the Supreme Courts order in Vallejo
as a blanket rejection of all contract claims seeking to hold a
permissive user responsible for damage to a borrowed vehicle.
Rather, we understand the order as rejecting the insurers
effort to convert a simple, permissive-user, tort-liability case
into a contract case by alleging an express or implied contract
of bailment, without providing specific factual allegations that
would support such a distinction. Stated differently, in any
permissive user case, except the unusual one in which a bailment
is expressly disavowed, it can be alleged that there is an
implied or express contract of bailment, and therefore an
enforceable contractual duty. The Supreme Court declined to
recognize such broad-based contractual liability in these
circumstances. The Courts express reference to the
insurers failure to support with factual allegations its
efforts to differentiate the case from any other permissive-user
situation implies that if the insurer had successfully
demonstrated the existence of an express contractual assumption
of responsibility for damage to the vehicle, the defendant might
not have been granted summary disposition. Thus, Vallejo did
not say that the existence of an express contract would not
differentiate the case from any other permissive-user situation.
Rather, it suggested that the potential for a different result
did exist, but that the plaintiff insurer had failed to provide
proof sufficient to support a different result.

We further observe that in a bailment
situation, in the absence of a contractual duty to the contrary,
a bailee is not an insurer of the property. The Gray Eagles v
Lucchesi, 37 Mich App 322, 323; 194 NW2d 373 (1971). Thus,
the Supreme Courts reluctance to recognize an exception to
the no-fault acts abrogation of tort immunity for such
ordinary negligence whenever an implied or express contract of
bailment is alleged, without regard to whether there is an
express contractual undertaking to assume responsibility, is
understandable.

3

Lastly, defendant asserts that in Vallejo
the Supreme Court found that recovery by the insurer was
precluded because the insurance statutes require coverage for
permissive users. To be sure, the Supreme Courts reference
in Vallejo to "pertinent insurance statutes, e.g.,
MCL 257.520(b)(2); MSA 9.2220(b)(2) and MCL 500.3009; MSA
24.13009" (see notes 6 and 7, supra,) as operating to
provide coverage to the permissive user is troubling in that the
distinction plaintiffs draw, correctly in our opinion, between
the mandatory coverage addressed in those provisions and the
optional collision coverage involved here was present as well in Vallejo.
Insurance coverage for vehicle collision damage is not
statutorily mandated and is expressly excluded from the
requirements of the Financial Responsibility Act. MCL 257.520(g);
MSA 9.2220(g). However, the Vallejo Court did not purport
to hold that these statutes preclude enforcement of a contractual
undertaking that does not contravene statutory requirements or
that they require that the permissive user be covered for
collision damage. Rather, the Court appeared to assume that
the defendant was covered, stating "the defendant appears
to have been insured by the plaintiff . . . since a standard
automobile policy typically insures such a permissive
driver . . ." In the instant case, defendant makes no
allegation that she is insured for this risk under the terms of
Universals policy, and the policy is not in the record or
otherwise before this Court. Indeed, we express no opinion on
issues relating to the actual insurance coverage present in this
case.[9]Further,
defendant does not argue that her contractual undertaking
violates Michigans no-fault insurance act, MCL 500.3101 et.
seq.; MSA 24.13101 et. seq., see State Farm v
Enterprise Leasing, 452 Mich 25; 549 NW2d 345 (1996), and
asserts only that the instant case is indistinguishable from Vallejoand Stout, which, defendant argues, hold that no
action lies against a permissive user of a loaner vehicle because
insurance statutes require the owner of the vehicle to provide
coverage that covers permissive users. We reject this argument
for the reasons stated and conclude that the district and circuit
courts erred in concluding that Vallejo precludes
plaintiffs from maintaining an action based on defendants
express contractual undertaking in the instant case.

We reverse the grant of summary disposition in
defendants favor and remand to the district court for entry
of judgment in plaintiffs favor unless it determines that
defendant has defenses that have not yet been addressed, in which
case the court shall conduct proceedings consistent with this
opinion. We do not retain jurisdiction.

/s/ Mark J. Cavanagh
/s/ William B. Murphy
/s/ Helene N. White

FOOTNOTES:

[1] The parties
stipulated to the consolidation of Betten Toyotas claim
with Universal Underwriters.

[T]he no-fault system is designed as a
substitute for common law tort remedies. Nothing in the
no-fault system relieves a motor vehicle operator of
liability that she may have incurred in contract.

* * *

[T]hats an attractive
proposition. And, frankly, Im inclined, to a large
extent, to agree with it. But, on the other hand, it . .
. does not appear to be . . . my responsibility to change
the law in the state of Michigan. . . . I feel
constrained to follow the opposite line of cases which is
most directly set forth in [Universal Underwriters Ins
Co v Vallejo, 436 Mich 873; 461 NW2d 364 (1989),
revg 179 Mich App 637; 446 NW2d 510 (1989)] which
is also relied upon, although its not controlling
it certainly is persuasive because it deals with the
exact situation that we have here of the Stout
decision where a permissive user signed an express
contract assuming responsibility for damages.

* * *

And, Stout said, our Supreme
Court noted in Vallejo that allegations of an
express or implied contract [of] bailment did not
differentiate the case from any other where a permissive
driver of a car is involved in a collision.

* * *

[T]he reason for all this is the
no-fault law, or the statute which is relied on is [MCL]
257.520(b)(2) which requires that every policy of
liability insurance insure the named insured and any
other permissive driver liability imposed by law for
damages arising out of the ownership maintenance or use
of the vehicle. Although the statute cited by the Supreme
Court does not specifically apply to collision damages
the Supreme Court applied it in Vallejo where
collision damages were at issue, and they found the
decision to be controlling; I do, as well.

[3] The Stout
Court relied on Vallejo in reversing the grant of summary
disposition to plaintiffs. The district court in the instant case
relied on Stout, and the circuit court relied on Stout andVallejo. As noted above, Stout is an unpublished
opinion of this Court and is of no precedential value. It is
mentioned only because relied on by the district and circuit
courts, and will not be discussed further.

[4] We recognize
that Vallejo also involved collision coverage but do not
read Vallejo as having been decided on the basis of any
statutory requirements. See section II B 3, infra.

Notwithstanding any other provision of
law, tort liability arising from the ownership,
maintenance, or use within this state of a motor vehicle with
respect to which the security required by section 3101
was in effect is abolished except as to:

(a) Intentionally caused harm to
persons or property. . . .

(b) Damages for noneconomic loss as
provided and limited in subsections (1) and (2).

(c) Damages for allowable expenses,
work loss, and survivor’s loss as defined in sections
3107 to 3110 in excess of the daily, monthly, and 3-year
limitations contained in those sections. . . .

(d) Damages up to $500.00 to motor
vehicles, to the extent that the damages are not covered
by insurance. An action for damages pursuant to this
subdivision shall be conducted in compliance with
subsection (4). [Emphasis added.]

[6] See also Hengartner
v Chet Swanson Sales, Inc, 132 Mich App 751; 348 NW2d 15
(1984), which involved the question whether the no-fault act or
the Motor Vehicle Service and Repair Act, MCL 257.1301 et seq.;
MSA 9.1720(1) et seq., controlled when an owner sued the
service facility that repaired her cars brakes. The repair
shop relied on Sect. 3135 of the no-fault act to disclaim
liability. This Court held that the service and repair act was
controlling because it was both more specific and more recent, id.
at 756, and further stated:

Finally, we note that MCL 500.3135;
MSA 24.13135 does not bar actions based on breach of
contract or breach of warranty. . . . Nonfeasance of
a contractual obligation supports only an action on the
contract; misfeasance of a contractual obligation or
breach of a duty distinct from a contract can support an
action on both tort and contract. . . . Here, plaintiff’s
complaint alleged a contractual relationship between the
parties, and the allegations in the complaint are
sufficient to support recovery on contract theories
as well as on tort theories. [132 Mich App 758. Emphasis
supplied.]

(a) A motor vehicle liability
policy as used in this chapter, shall mean an
owners or operators policy of liability
insurance, certified . . . as proof of financial
responsibility, and issued . . . by an insurance carrier
duly authorized to transact business in this state . . .

(b) Such owners policy of
liability insurance:

* * *

(2) Shall insure the person named
therein and any other person, as insured, using any such
motor vehicle or motor vehicles with the express or
implied permission of such named insured, against loss
from the liability imposed by law for damages arising out
of the ownership, maintenance or use of such motor
vehicle . . . as follows: $20,000 because of bodily
injury to or death of 1 person in any 1 accident . . . .

(1) An automobile liability or motor
vehicle liability policy insuring against loss resulting
from liability imposed by law for property damage, bodily
injury, or death suffered by any person arising out of
the ownership, maintenance, or use of a motor vehicle
shall not be delivered or issued . . . unless the
liability coverage is subject to a limit, exclusive of
interest and costs, of not less than $20,000 because of
bodily injury to or death of 1 person in any 1 accident .
. .

[9] We also observe that it is not alleged that defendant
does not have, or that a person in defendants position
would be unable to secure, insurance that would provide coverage
for this risk, and no public policy argument is made to us based
on such an allegation.